PM P1: Supply Theory

What is Supply?

The quantity of a good or service that producers are willing and able to offer for sale at each given price over a given period of time.

What is the Law of Supply?

The quantity supplied is directly related to its price, ceteris paribus. -> Upward sloping supply curve.

What is the Law of Diminishing Marginal Returns (LDMR)? (Reason for Law of Supply)

Beyond a certain point of production, adding an additional factor of production results in smaller increases in output (i.e., marginal cost increases).

What is the Marginalist Principle? (Producer Decision for Law of Supply)

Rational producer maximises profits by producing up to the point where Price (P) equals Marginal Cost (MC). P > MC -> produce more; P < MC -> produce less.

What is a Movement along the Supply Curve?

Changes in quantity supplied arising from a change in price of the good itself, ceteris paribus.

What is a Shift of the Supply Curve?

Changes in non-price determinants of supply, assuming no change in the price of the good itself.

What is a Change in Quantity Supplied?

A movement along the supply curve.

What is a Change in Supply?

A shift of the supply curve.

What are Non-Price Determinants of Supply? (Factors shifting SS curve)

Factors that shift the market supply curve.

What is Cost of Production? (Non-Price SS Factor)

Influenced by factor inputs, technology, government policies. Generally, ↓ COP -> ↑ SS.

What are Price and Availability of Factor Inputs? (COP Factor)

Input cost ↑ -> production less profitable -> SS shifts leftward.

What is Innovation/Changes in Technology? (COP Factor)

Tech improvements -> ↑ productivity -> ↓ cost per unit -> SS shifts rightward.

What are Government Policies? (COP Factor)

Indirect taxes and subsidies affect cost of production.

What is an Indirect Tax?

Levied on producers -> ↑ production cost -> ↓ profitability -> SS shifts leftward.

What is an Indirect Subsidy?

Payment by government to firms -> ↓ production cost -> ↑ profitability -> SS shifts rightward.

What are Prices of Related Goods? (Non-Price SS Factor)

Joint supply or Competitive supply.

What is Joint Supply?

Production of goods derived from a single product (not possible to produce more of one without more of the other). Ponejointproduct ↑ -> SSotherjointproduct ↑.

What is Competitive Supply?

Production of goods using same resources (producing more of one means less of the other). Ponecompetingproduct ↑ -> SSothercompetingproduct ↓.

What are Expectations of Future Prices? (Non-Price SS Factor)

Producers expect P ↑ in future -> temporarily reduce current sales (build stocks) -> SS shifts leftward. Producers expect P ↓ -> SS shifts rightward.

What is Entry/Exit of Firms? (Non-Price SS Factor)

Entry of new firms -> ↑ market supply. Exit of firms -> ↓ market supply.

What are Weather Conditions and Natural Factors? (Non-Price SS Factor)

Favorable weather -> ↑ SS agricultural products. Natural disasters -> ↓ SS agricultural products.